Author: Andrew M. Thaler
In the age of the pandemic, the only certainty for businesses is that there will be uncertainty until there is certainty. That sounds like an absurd riddle but it is true. Consider what is now on the plate of the small business owner. If application was made for a Payment Protection Program loan (“PPP”) but awaits approval, will it ever be funded? In the meanwhile should employers lay people off or reduce salaries? If employees are laid off will they come back to work when things settle down? What is the likelihood of employees coming back to work if they can make more money from unemployment benefits than their regular pay? Do employees not return because of fear of exposure to the virus at work? If a PPP loan is obtained, will at least 75% of the loan be utilized for payroll and approved expenses such that the loan will be forgiven?
Bob Hope is credited with saying “A bank is a place that will lend you money if you can prove that you don’t need it.” Is it strange then that the Small Business Administration’s application for a PP loan states that a loan applicant in bankruptcy is not eligible for funding? However the CARES Act apparently contains no such prohibition. The bankruptcy code and the CARES Act are designed to help save businesses faced with financial distress. Can one imagine a more appropriate time for a business to avail itself of bankruptcy and a PPP loan than the unprecedented pandemic?
The American Bankruptcy Institute and Wall Street Journal recently reported on lawsuits brought against the SBA on this very issue. The SBA has said that giving loans to companies in bankruptcy “would present an unacceptably high risk of an unauthorized use of funds or non-repayment of unforgiven loans”. What if a PPP loan was obtained? There does not appear to be any prohibition against filing bankruptcy after receiving the loan. And since the PPP loan is not guaranteed by the owner, even if the loan is not “forgiven”, the SBA loan stands behind secured creditors and is just another unsecured creditor that likely will receive pennies on the dollar or nothing if the business does not survive. The whole purpose of the CARES Act is to save jobs, something bankruptcy also accomplishes in many instances where the business that employs them survives because of the benefits afforded by bankruptcy.
The recently enacted Small Business Subchapter V of Chapter 11 which made it less complicated to file a bankruptcy reorganization, is a mechanism by which businesses can reorganize and save jobs. The plan does not have to be voted upon by creditors and, the owners can retain their interest in the business even if all creditors are not paid in full, something not available in a conventional chapter 11. The CARES Act temporarily increased the aggregate secured and unsecured debt limits to qualify for SBD from $2,727,625 to $7,500,000 for one year.
Bankruptcy can assist the debtor in reducing debt, reject or restructure burdensome leases and contracts and in some cases have an orderly liquidation of its assets. An individual whose principal residence is encumbered by a mortgage that was not used primarily to acquire the residence can seek to modify the loan, something not available under other chapters of the bankruptcy code. In short, it will be more difficult for a creditor to take away the residence of a business owner who gave a collateral mortgage on their house to secure a loan to the business.
The American Bankruptcy Institute and Wall Street Journal recently reported on lawsuits brought against the SBA on this very issue. The SBA has said that giving loans to companies in bankruptcy “would present an unacceptably high risk of an unauthorized use of funds or non-repayment of unforgiven loans”. What if a PPP loan was obtained? There does not appear to be any prohibition against filing bankruptcy after receiving the loan. And since the PPP loan is not guaranteed by the owner, even if the loan is not “forgiven”, the SBA loan stands behind secured creditors and is just another unsecured creditor that likely will receive pennies on the dollar or nothing if the business does not survive. The whole purpose of the CARES Act is to save jobs, something bankruptcy also accomplishes in many instances where the business that employs them survives because of the benefits afforded by bankruptcy.
The recently enacted Small Business Subchapter V of Chapter 11 which made it less complicated to file a bankruptcy reorganization, is a mechanism by which businesses can reorganize and save jobs. The plan does not have to be voted upon by creditors and, the owners can retain their interest in the business even if all creditors are not paid in full, something not available in a conventional chapter 11. The CARES Act temporarily increased the aggregate secured and unsecured debt limits to qualify for SBD from $2,727,625 to $7,500,000 for one year.
Bankruptcy can assist the debtor in reducing debt, reject or restructure burdensome leases and contracts and in some cases have an orderly liquidation of its assets. An individual whose principal residence is encumbered by a mortgage that was not used primarily to acquire the residence can seek to modify the loan, something not available under other chapters of the bankruptcy code. In short, it will be more difficult for a creditor to take away the residence of a business owner who gave a collateral mortgage on their house to secure a loan to the business.
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